India has the highest growth potential: Sandip Sabharwal

How do you see the markets to pan out given the political uncertainty we are going through? What would be the worst case scenario for the markets if there are early elections?

The current political uncertainty could prove to be a boon for the economy and the markets. We are finally seeing the real Prime Minister and I guess that before he retires he wants to redeem his reformist credentials. We have seen over the last couple of years that most important economic decisions were postponed or cancelled due to the threat from its political ally, the TMC. There are enough parties who do not want elections at this stage and even the main opposition party would want to see the results of the Gujarat elections before taking any major decision.I believe that the government is finally moving towards working for the good of the economy. Subsidy reforms and attracting foreign capital are absolutely essential in a scenario of high fiscal deficit, economic slowdown as well as at a time when the current account deficit is very high. Early elections could create a knee jerk reaction on the downside, however elections do not seem imminent at this stage.

Given all the challenges facing Indian economy how are the foreign institutional investors (FII) viewing Indian equity markets?

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Among the larger global economies India has the highest growth potential at this stage given huge shortages across segments like roads, ports, power, urban infrastructure etc. The demographics of India are one of the best and the financial system, including RBI are highly regarded. In a scenario where growth is likely to be bleak across the Western world and also the growth constraints facing China we are well placed to attract foreign capital.

Also, in a global environment where most countries are scared of deflation India has the opposite problem of Inflation. Return potential for investments in countries facing inflation tend to be quite high. There is enough cheap money floating around globally looking for investment into countries that offer high returns. As such I see huge flows from both FII's as well as FDI if we have a welcoming attitude towards foreign investors, which includes a stable taxation regime with no retrospective amendments. Shome panel recommendations, if implemented will open up the potential of attracting huge amounts of capital into India. Over the medium to long term the main issues will be to increase the absorptive capacity of the economy for foreign flows rather than being worried about whether the money will come in.

Which sectors and stocks look attractive at current level on the basis of valuations from a medium term perspective?

Private sector banks and financial institutions which do not face capital constraints look good from a valuation and growth perspective. Given that we are at the peak of the interest rate cycle and input cost pressures are easing off the auto sector stocks look well placed. Demand outlook is also likely to improve given the good pick up in monsoons and a revival in rural demand. Selective infrastructure stocks could also do well rendering high percentage returns given the new found zeal on taking economic supportive decisions by the government and if some issues related to the viability and implementation of road and power projects are resolved. The idea of the National Investment Board as proposed by the Finance Minister can be a key positive for these stocks.

Valuations of 35-50X Price to Earnings ratio can never be justified irrespective of the logic. There is always a reversion to mean as we saw in the case of IT stocks in 2000 and infrastructure stocks in 2007. FMCG stocks across the board looks highly overpriced given the growth prospects. Fear has driven irrational and excessive money towards stocks of this sector. I believe that this sector could be a big under performer going forward. Some pharma stocks still have value given the growth drivers. However, a reversal in the direction of the rupee could hit the margins of these companies as exports has been a big driver of earnings. This sector could still have value selectively.

"In a scenario where growth is likely to be bleak across the Western world and also the growth constraints facing China we are well placed to attract foreign capital

What is your near term outlook on gold and silver?

I believe that gold has got disproportionate allocation from investors since the crisis of 2008. Where physical demand has come under pressure, investment demand has driven gold prices. Central banks have joined the bandwagon late and are into panic buying lately. Stability in Europe and the global financial system should be negative for gold. As such, unless and until we see a revival in the Euro Crisis gold prices could be range bound at best. Silver has two sides to it, it has been used as a substitute for gold in jewellery use, it has industrial usage and it has also been used as a hedge against the loss of faith in paper currencies. As such it is a difficult commodity to call. However, the reality is that it is a surplus commodity globally and if investment demand slows down prices will come down.

Besides equities which other investment destination is looking attractive at current juncture?

An investor in India will make returns from equities and land investments. Given the demographics of the country land will always be in shortage. As such land (not necessarily real estate) should always get an allocation from investors.